The UK and 50 years of public sector over-reach

We can forget hopes of dealing with Labour’s public spending excesses in just
one parliament

The healthcare forecasts look particularly suspect, relying as they do on a very substantial improvement in productivity quite out of line with anything that has been achieved in the pastPhoto: Getty Images

You’ll be pleased to know that the Office for Budget Responsibility (OBR) has crunched the numbers, and the long term outlook for the public finances is not quite as unsustainable as it was a year ago.

This is largely because the Government has announced plans both for further spending cuts into the next parliament and to limit the costs of the state pension by raising the age of entitlement in line with improving life expectancy. The Treasury likes to think it has therefore added a long-term plan to restoring the public finances to its existing short term one.

Nonetheless, the fiscal outlook continues to seem quite unsustainable enough. To get the national debt truly under control, the OBR judges in its latest Fiscal Sustainability Report, will require a further tightening beyond present plans of 0.9pc of GDP in 2019/20, or £15bn in today’s money, whereas to get the national debt back to 40pc in the long term and then keep it there would require an additional squeeze of a full 1.7pc of GDP, or nearly £30bn in today’s money.

Forget hopes of dealing with Labour’s public spending excesses in just one parliament. On and on, the corrective action has to go. Prospects for a radical tax-cutting agenda look further away than ever.

You may of course want to take all this with a large pinch of salt. Forecasting even for the next year is difficult enough, but long-term forecasting like this isn’t frankly much better than guess work. As it is, a myriad of different events and policy changes are likely to come along, rendering most of these estimates worthless.

Yet worryingly, many of the assumptions that underlie this somewhat bleak peer into the long-term future look if anything to be on the optimistic side.

Assumed growth of 2.4pc per annum? Mmmm. Productivity growth of 2.2pc per annum? Not without a very much more dramatic programme of structural, supply-side reform than we’ve seen to date.

The healthcare forecasts look particularly suspect, relying as they do on a very substantial improvement in productivity quite out of line with anything that has been achieved in the past.

In most industries, productivity gain tends to be driven by a combination of three things – competition, profit motive and innovation. Only one of these phenomena exists in the National Health Service, innovation, and unfortunately when it comes to healthcare, innovation tends to be about adding to cost, through new treatments, rather than cutting it.

This is not to criticise the NHS. As it stands, the NHS is remarkably good value for money. Its cost is roughly equivalent as a share of GDP to what the US spends on public healthcare, yet the service provided is hugely superior. Yet it faces huge challenges in catering for an ageing population.

Regrettably, Britain still has a mountain to climb in getting to grips with more than 50 years of public sector over-reach.